Global Economics

Two More IPOs Flop in Hong Kong

As projected, Evergrande Real Estate Group became the latest victim of the volatile market conditions as it was forced to withdraw its Hong Kong initial public offering last week. The property developer, which had been aiming to raise between $1.3 billion and $2.1 billion, failed to attract sufficient demand both from institutional and retail investors, sources say.

Wing Fat Printing suffered the same fate, which was somewhat more surprising given its much smaller size at $78 million to $88 million and the fact that it was a spin-off from well-known red-chip conglomerate Shanghai Industrial Holdings. That it too was pulled shows how nervous investors are about committing money to IPOs at the moment and also how difficult it has become to price these deals as other stocks in the same sector keep falling.

"It's not necessarily that the deals are bad, it's just that the market is taking the attention of the deals and people are looking over their shoulder all the time. It's difficult to get investors to concentrate and put in bids when you don't know how what will happen tomorrow," one banker says.

The Hang Seng Index has fallen 8.7% since Evergrande kicked off its roadshow on March 6 and is currently trading at its lowest levels since August 21. It has lost 24% since the beginning of this year, making it the worst performing market in Asia year-to-date after Shanghai and Hanoi. However, other Asian markets rebounded yesterday while Hong Kong was closed for Easter Monday and with Wall Street up over night as well, it seems likely the HSI will see some buying today.

The cancellation of Evergrande and Wing Fat on the day they were both due to price (last Thursday) came just over a week after China Pacific Insurance decided to call off its plans for an H-share offering of at least $3.2 billion after five days of pre-marketing because of sharp falls in the share prices of other Chinese insurers. China's third largest life insurer also had limited pricing flexibility on the downside thanks to a floor price that couldn't be undercut.

According to Dealogic, this brings the number of IPOs that have been postponed or delayed in the Hong Kong market year-to-date to eight, which is more than in any of the preceding five years. In 2007 only one IPO was postponed and 2005 and 2006 each saw the withdrawal of four deals before pricing. Globally, 99 IPOs have been withdrawn so far this year.

These statistics include deals that were later successfully re-launched, however, which means that China Railway Construction Corporation (CRCC) and Solargiga Energy Holdings are both included in the 2008 numbers since their initial plans to complete an IPO in January were cancelled.

CRCC returned with its near simultaneous A- and H-share IPOs in late February and successfully raised a combined $5.4 billion, which at the time of pricing was the largest IPO in the world this year. This has since been exceeded by Visa's mega-offering of $17.9 billion.

Solargiga came back with a significantly down-scaled version of its original offering two weeks ago and was one of two companies that managed to complete a Hong Kong IPO last week. The other one was Xingfa Aluminium, which raised a modest $37 million.

Solargiga offered its shares at a fixed price of HK$2.92 per share—or 11 times this year's earnings—and kept its institutional order book open for only two days, which helped limit the market exposure while the offering was ongoing. The company, which makes monocrystalline wafers and ingots for solar cells, raised $127 million, or 56% less than the $292 million it targeted when the deal was first launched in January. According to sources, the 10% retail tranche was just over 85% covered, while the institutional portion was about twice covered. More than 100 institutional investors were said to have participated in the deal, which was arranged by BNP Paribas.

Another source said Xingfa Aluminium's retail tranche, which accounted for 10% of the deal, was fully subscribed and the remaining institutional tranche was "comfortably covered" by about 50 investors. The deal was priced at the bottom of the range at HK$2.28, which is equal to six times its 2008 earnings. ICEA was the sole bookrunner.

There was no information regarding the specific coverage ratio for either Evergrande or Wing Fat, but Evergrande in particular was believed to have been well short of a full book as Chinese property stocks were under a lot of pressure. Its closest peers tumbled 20%-30% during the roadshow, erasing virtually the entire valuation discount that was there at the launch.

Adding to the woes during the marketing period was the collapse of Bear Stearns, violent protests in Tibet, a flu scare that closed down all Hong Kong primary schools for two weeks and yet another increase of the reserve ratio requirement for Chinese banks by 50bp, which will come into effect today. The latter in particular is bound to increase the pressure on mainland developers who are already facing strict lending policies.

Against that backdrop, it didn't help that the US stockmarket rebounded on the final day of Evergrande's bookbuilding after the Federal Reserve cut its benchmark interest rate by three-quarters of a point to 2.25% in a bid to ease the credit concerns in the market.

Wing Fat's deal came under pressure after Nine Dragons Paper, a producer of linerboard, corrugated board and other packaging materials, last Monday reported lower-than-expected earnings for the first six months of its current fiscal year as higher raw material costs eroded its margins. Its share price plunged 40% on the day, leaving investors in fear that Wing Fat's margins may also be about to deteriorate.

"Only a small part of Wing Fat's business is similar to that of Nine Dragons and the printing bit is completely different, but in this market everybody is just looking for an excuse to stay away from things," one source says.

Also last week, Far East Consortium International said it had decided to postpone until further notice a planned spin-off of seven hotels into a real estate investment trust for a separate listing in Hong Kong "as a result of recent rising volatility in global capital markets." The deal had been on track to be launched in April and was expected to raise about $300 million. Deutsche Bank and HSBC were to be joint bookrunners.

It is worth noting, however, that global investors are not turning their backs on all IPOs as Visa was able to price its offering above the initial $37-$42 range at $44 after the US market closed last Tuesday. It then surged an additional 28% to $56.50 when it started trading on Wednesday, which prompted the bookrunners to exercise the overallotment option in full and boosted the size of the IPO to $19.7 billion.

Investors liked the credit card issuer because it is a financial services company without any credit risk as it manages the card transactions, but doesn't lend any money of its own.

The next test for the Hong Kong market will be the trading debut tomorrow of Want Want China Holdings, a producer of rice crackers, flavoured milk and soft candy, which completed its $1.04 billion offering more than a week ago. While the expected rebound in the general market should help, some observers say the buying interest is likely to be light as its closest comps have fallen another 10%-20% since Want Want was priced. The company fixed the price at the bottom of the range at $3 per share, which translates into 20.1 times this year's projected earnings. BNP Paribas, Goldman Sachs and UBS were the joint bookrunners.

Solargiga and Xingfa Aluminium will both start trading on March 31.

Evergrande, which focuses primarily on residential developments in second-tier cities, was brought to market by Credit Suisse, Goldman Sachs and Merrill Lynch. Wing Fat makes printed packaging material for the tobacco and alcohol industry. Its IPO was being arranged by BNP Paribas and UBS.